Yet Another Way Student Debt Keeps People from Buying Homes

The financial constraints of major student loans make it harder for hundreds of thousands of Americans to buy their first homes. But so does a small technicality—one that the Federal Housing Administration could fix.

Tariq Habash was in the market to buy a home in 2016, and he knew there were a couple of factors that the banks would be looking at to figure out whether he would get a loan, for how much, and what the terms would be. There was his credit score, his down payment, and his assets. Then there were his liabilities: credit-card debt, car payments, and student-loan debt. But he found something troubling when lenders were calculating his student-loan debt payments: They were saying he owed a lot more than he actually had to pay.

Why was that? Habash, who was a 25-year-old living in Washington, D.C., at the time, was in an “income-driven repayment” plan, which allows borrowers to pay a reduced amount for their student loans each month based on their income and family size. The mortgage lenders Habash was going to did not look at that lower monthly payment, and instead calculated monthly payments based on the size of his loan.

Habash, a senior policy analyst at the Century Foundation, was ultimately able to work his situation out with lenders, and get a mortgage that was reasonable. But others without his sort of expertise are often stuck unable to get a mortgage. Income-driven repayment plans are meant to help people who might otherwise struggle to repay student-loan debt—mostly people who earn between $20,000 and $60,000, according to Kristen Blagg of the Urban Institute. If a borrower makes regular payments of the agreed-upon amount for 20 to 25 years, based on a specific income-driven repayment plan, the outstanding debt will be forgiven. But lenders did not take the discounted payment amounts into consideration, which at times led to the bank surmising that a borrower had too much debt to be able to make their monthly payments—and ultimately to a mortgage denial.

In April 2017, the federally controlled mortgage giants Fannie Mae and Freddie Mac, after heeding calls to change how they assess potential borrowers who use income-driven repayment plans, changed their rules, allowing borrowers to use their actual monthly payments for student loans as opposed to an arbitrarily calculated payment. That meant borrowers enrolled in income-driven repayment plans would potentially have lower debt-to-income ratios, and could qualify for better mortgages.

But those two companies are only part of the home-loan market. The Federal Housing Administration, a branch of the Department of Housing and Urban Development, which oversees FHA loans—government-backed loans intended for low-income borrowers—has not followed suit. (Critics of Fannie Mae and Freddie Mac argue that their baselines of credit score and down payment are still prohibitive for many potential homebuyers, even if they were able to make monthly payments.) As a result, low-income borrowers in search of even the most modest home loans might be left wanting.

“When you’re in active repayment, you don’t need to make some sort of calculation, because the reality is: You have a student-loan payment amount,” Habash told me, “and that should be factored in.” FHA loans are often used by people who have higher levels of debt, and who don’t have top-notch credit scores, he says. But when the government is inflating the debt-repayment amount, the would-be-borrowers who might need to use FHA loans the most are left out. It’s a case of two government policies, both intended to help low-income people, that are not communicating well.

Brian Sullivan, a spokesman for the Department of Housing and Urban Development, told me that despite calls to revisit considering income-based repayment, the department would be hard-pressed to do so. “We’ve been asked to revisit this issue, and we’ve been taken to task by those who wish we would revisit this issue, but we’re not.” In 2013, the Federal Housing Administration, for the first time in its history, had to request a bailout from the Treasury—a mandatory appropriation of $1.7 billion dollars. “In the climate we face today, and with people being very keen on avoiding risk here,” Sullivan said, “nobody ever wants that to happen again.”

“In the treatment of student debt, we made a policy decision not that long ago to treat deferred student debt as debt all the same, and in the case of your question—whether we would forecast timely student-debt repayment that might ultimately lead to the forgiveness of a portion of that debt—our rules just don’t contemplate that.”

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Adam Harris is a staff writer at The Atlantic, where he covers education.